By Aaron Michael C. Sy, Reporter
A PHILIPPINE central bank plan to consolidate rural banks could boost their capital but will not ensure lending to the agriculture sector, according to industry experts.
“Admittedly, mergers and consolidations result in bigger entities that, as a result of their combined financial positions, make for a stronger bank,” Mary Ann Tupasi-Saddul, former president of the Rural Bankers Association of the Philippines, said in an e-mail. “Mere size, however, does not automatically ensure a bank will lend to agriculture.”
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. earlier said the central bank is looking at consolidating rural banks to make them more resilient and meet capital requirements so they can lend more to the agriculture sector.
In September 2022, the BSP raised the minimum capital requirement for rural banks with a head office and as many as five branches to P50 million, while those with six to 10 branches must have a minimum capital of P120 million. Those with more than 10 branches must have a capital of at least P200 million.
Rural banks have until 2027 to comply.
“If the BSP wants fewer and stronger banks, then requiring higher capitalization will result in consolidation and fewer banks,” Calixto V. Chikiamco, president of the Foundation for Economic Freedom, said in a Viber message. “If the BSP wants them to lend to agriculture, fewer and bigger banks won’t necessarily lead to more agricultural lending.”
Ms. Saddul said rural banks might have opted out of lending to farmers due to climate risks, the absence of effective guarantee systems and acceptable collateral.
The BSP’s mandate for banks to diversify lending into nonagricultural sectors to mitigate credit risks also led to rural lenders’ shift in lending to consumers, she added.
“BSP’s capital adequacy framework imbues banks with the need to seek out the most effective use of bank capital, which may not necessarily be in the form of exposure to the agricultural sector,” she added.
Ms. Saddul said rural banks had the highest level of compliance in lending to the sector before the Agri-Agra Law was revised in October 2022.
She noted that the BSP should instead add support mechanisms such as incentives and guarantees for lending to mandated sectors.
It could also expand credit scoring analytics for agriculture and small businesses.
Increasing rural banks’ capital requirement could be unsustainable because it could push them to hire more people, increase costs and close down, Enrico P. Villanueva, a senior economic lecturer at the University of the Philippines Los Baños, said in a blog.
“BSP’s concern for rural bank stability and contagion to the bigger financial system is valid, more so in the light of irresponsible rural bankers who left their depositors hanging by engaging in unsound banking practices,” he said. “But maybe it is time to abandon the absolute capital requirement in favor of the global requirement of capital relative to risk assets.”